The following links highlight DOLLAR$ & $ENSE articles from our CIC Info Bytes newsletter.

• 04/18/24: ...

• 03/28/24: Household Debt Surges, Debt Service Beats Savings, Housing Costs Hurt, Rates are Stabilizing-ish

• 03/14/24: So Much Debt, VIDEO: The Price of Money Is Going UP, Inflation Easing from Peak but Not Over

• 02/29/24: What Landing?, Inflation Ticks Back Up, CRE Crisis Underway

• 02/15/24: Interview with Jerome Powell, Soverign Debt Dilemma, Rates Holding Steady, CRE Bust

• 02/01/24: Deficits in a "Terrible Place," Inflation Receding, De-Stigmatizing Bank Stability, Lack of Savings

• 01/18/24: Wage Inflation Redux, Rate Cut Bets, Staying Plugged in: Rebalancing Investments

• 01/04/24: Personal-consumption expenditures price index declines, Rates Waiting for a Sign

• 12/21/23: Rates Holding Steady as Inflation Expectations Stabilize, $18 Trillion in Assets

• 12/11/23: Minimum Wage Inflation, Costs Elevated as Inflation Trends Down, 10 Year Yield Crash, Buy and Hold Wins (again) 

• 11/23/23: Unexpected Expenses, Debt, Peak Interest Rates, Deeply Counterintuitive Debt to Yield Ratio, Duration Matters, Returns

• 11/09/23: Bonds go Berserk, Investment Mistakes to Avoid, Central Banks Tap the Brakes...for Good?!

• 10/26/23: Global Inflation is a Brisk Medium-Rare, Risk and Rewards in Treasury Bonds, Housing or Transportation?

• 10/12/23: Looming Recession, Don't Miss Out!: Invest for the Long-Term, Bond Rout, Debt is Soaring

• 09/28/23: FOMC & ECB Holding Rates Steady, Recession Inbound?, Proper Diversification, Yields Headed Higher

• 09/14/23: ECB Goes to 4.5%, Pay the Piper for Gorging on Low Rates, Hot Deposits, Are Munis Worth It?

• 08/31/23: Go Long: We're Heading for the 5% World, Unwavering Pursuit of 2%, Peak Financial Decisions at ages 53 to 54

• 08/17/23: Government Debt Interest Payments Surge, Retirement Funds, Social Security Cuts, Poor Millionaires

• 08/03/23: Is 5.50% the end of monetary tightening in the US?, Big Numbers to Retire, US Credit Downgrade

• 07/20/23: One. More. Hike (FOMC), Inflation Decelerates More Than Forecast

• 07/06/23: What Recession?!, More Hikes Imminent?, Banks Are Paying Up (in interest expense), Investors Favor Government Bonds

• 06/22/23: FOMC Holds Rates Steady (rest of world keeps going), The End of Rate Hikes?  The Future Looks Unclear

• 06/08/23: US Debt Ceiling Suspended for Now, Temporary Pause >>> More Rate Hikes Imminent?, Investment Options

• 05/25/23: Rates. Keep. Going. UP!, More Inflation, Good Luck! (index investing still rules), Retirement Crisis

• 05/11/23: Rates. Keep. Going. UP!, More on I-Bonds (yawn), YES, Your Deposits ARE Safe

• 04/27/23: Wealthiest Cities, Disparate Yield, Criticized Loans, May 3: Next FOMC Meeting, Cashing In & Out

• 04/13/23: Inflation's Still Hot, Money Markets Beating Banks, I-Bonds Once Again Unappealing, Fear of Loss

• 03/30/23: Central Banks Keep Raising Rates, Commercial Real Estate Doom Loop & more...

• 03/16/23: Bank Failures, How are YOUR Funds Insured?, Deposit Rates Catching Up, Inflation & more...

• 03/02/23: Bank CDs are an Insult, Banks Score Big Profits on How Little They Pay You

• 02/16/23: Investors missing out on higher rates, Sideways Markets, Widening Deficit

• 02/02/23: Fed Hikes Rates 25bps, Soft Landing or Crash Landing?

• 01/19/23: Crisis Averted?, Inflation Humor, 60/40, Alphabet Soup of Financial Advisors

• 01/08/23: Americans Expect Worsening Economy in 2023

• 12/31/22: "Like a mugging...", Mortgage rates on FIRE

• 12/15/22: Fed Hikes 50bps, Wise words from Mohamed El-Erian, Money-Market Yields

• 12/08/22: What types of bonds deliver the best returns?, TIPS, Yield Curve Inversion & more

• 12/08/22: WSJ - The $42 Billion Question: Why Aren't Americans Ditching Big Banks? 

Since the start of 2019, Americans have lost out on at least $291 billion in interest by keeping their savings in the five biggest banks. That total balloons to $603 billion when going back to 2014, when the FDIC started tracking consumer deposits in money-market and other savings accounts.  Why haven’t savers moved more of their money?

• Opening a new bank account is time consuming.

• Some customers aren’t aware of how much money they could make by switching.  Others just don't care.

• People don’t think critically about financial decisions. - WSJ 12/08/22

• 12/01/22: Profound Economic Shift, Recession & Stagflation Risk, I-Bonds: It Pays to Procrastinate

• 11/04/22: WSJ - Do You Know Your Financial Advisor?!

…”for years people like me have been telling you that advisers have to disclose much more about themselves than stockbrokers do, so you can make better-informed decisions about their services and integrity… however, that isn’t always true. In some ways, financial advisers have to disclose less than brokers do—and what they don’t tell you could hurt you.”

• 11/06/22: WSJ - The Best Places to Get Income in the Bond Market Now

• • Bonds have done so poorly this year that many investors probably are wondering what the point is of owning any.

• It’s unsurprising that many are fleeing the bond market, but those investors could be missing some key points, experts say. The market now may not be far from its cyclical low.  And even if it doesn’t recover quickly, bondholders will continue to enjoy a decent stream of interest payments.

• 11/03/22: Fed Hikes 75bps, Signals Slower Increases but Ultimately Higher Rates

• Accrual Accounting — A practice required by statutes in various states such as RCW 64.90.530 that conforms with Generally Accepted Accounting Principles (GAAP).  More robust than the cash method, the accrual method books expenses and revenue at the time of service.   Learn more.

• Retained Earnings (RE) — Accounting parlance for surplus funds (operating or reserve). ASC 606 is a revenue recognition standard applicable to common interest communities that have accrual accounting.  Learn more here and by reading Presentation Of Contract Assets And Contract Liabilities In ASC 606).

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• Operating Funds — Community association operating funds generally pay for everything except projects funded by working capital.  Annual operating budgets pay into insurance reserves, replacement reserves, and ultimately for capital improvements.

• Insurance Reserves — Generally used to pay for: 1) insurance premiums and 2) insurance claims (depending on your governing documents)

• Replacement Reserves — Generally used to pay for maintenance, repair and replacement of existing components, except for time-limited borrowing.

• Working Capital — Generally a fund built from one-time fees assessed to new members (homeowners) to fund "startup operations" (see NJ Administrative Code § 5:26-8.6).  Some associations charge capital assessments each time a home / unit is sold to a new owner / member.  In those cases, the capital assessment may be used for purposes defined by statute and the association's governing documents.

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• Accounts Payable — Money the association owes to another party for goods, services, insurance deductibles, etc.

• Accounts Receivable — Money the association is owed such as homeowner assessments, fees, insurance payouts, refunds, violation penalties, etc.

• Balance Sheet — A statement of the assets, liabilities, and capital at a particular point in time.

• Income & Expense Ledger — A record of revenue and expenses coded to individual line-items within the operating budget.

• General Ledger — The main source record that typically includes double-entry accounting and journal entries for every coded expense and revenue source with the date, category, code and description.

• Delinquency / Aged AR Report — A record of all delinquencies including amounts currently owed (due within the past 30 days) and buckets for amounts that are 30+, 60+, 90+ and 120+ days past due.

• Bank Reconciliation — A comparison of the cash balance on hand with the monthly bank statement balance.

• Invoices — Individual documents received from third parties evidencing the good and/or service (to be) provided with varying levels of detail and that includes an amount due.

• Receipts — Individual documents received from third parties evidencing a payment received (that could also include an updated invoice).

ANNUAL BUDGET 1-2-3: PROCESS RECOMMENDATIONS to ACHIEVE

ACCOUNTABILITY, TRANSPARENCY & THOROUGHNESS

While ultimately subject to your state statutes, most states do not prescribe the exact process to analyze, review and approve your annual budget.  Lack of an exacting legal prescription leads us to many great examples of accountable, transparent budgeting processes that engage constituents (your homeowner members).   Process matters!  View a detailed checklist below on this page.

1. Stand up a committee and/or dedicate Board meeting time to review the draft budget.

   • Plan to spend a minimum of one to two hours of meeting time reviewing your annual budget.Gather line-item budget data in a spreadsheet.  Use a readily editable product with columns and rows: Excel, Google Sheets, etc.

2. Ensure everyone involved can easily collaborate.

   • Use collaborative online tools like Sharepoint or Google Drive.  Eschew emailing copies of static documents that are prone to change.

   • Hold meetings.  Trying to review a line-item budget via email is an incredibly inefficient and often frustrating experience.

3. Gather inputs from all your utility providers and vendors. 

4. Review YTD actuals and prior year actuals.

5. Review employee annual compensation adjustments.

6. Compile line-item budget data in a spreadsheet (view 

7. Transmit a budget recommendation to the Board.

8. Dedicate an entire Board meeting to reviewing and adjusting the budget recommendation.

9. Disclose an initial draft of the budget at an open Board meeting at least one month before you plan to approval the final draft.

10. Approve a final draft for ratification at a well-advertised, open Board meeting.

11. If your CIC is located in Washington State (and certain others), you are REQUIRED to (see below):

    • provide adequate notice (including all required content) of a budget ratification meeting AND

    • hold a budget ratification meeting of members

      • N.B.  budgets are automatically ratified UNLESS a majority of the allocated voting power actively dissents to adoption (rare)

        • A 2013 WSCAI post is out of date re: requirements, but still provides helpful language for the ratification meeting:

          1. Version 1: “No motion to reject the budget having been made, the budget is ratified.” 

          2. Version 2: “Since a majority of the total voting power of the association is not present in person or by proxy at this meeting, it is legally impossible for the budget to be rejected.  The budget is therefore ratified.”

What's in an Annual Operating Budget?

Annual operating budgets are line-item groupings of estimated dollar costs broken down into buckets that "make sense."  Porta-potties are a line-item expense for a specific event, not a line-item for your annual operating budget.

Budgets typically include REVENUE line-items followed EXPENSE line-items broken down something like this:

• REVENUE LINE-ITEMS: (common examples)

  1. Regular Assessments

  2. Special Assessments

  3. Interest Income

  4. Violation Penalties

  5. Late Fees

  6. Administrative Fees

  7. Change of Occupancy Fees

  8. Device Fees

  9. Amenity Usage Fees

  10. Pet Fees

  11. EV Licenses

• EXPENSE CATEGORIES: (common examples)

  1. ADMINISTRATION

  2. MAINTENANCE

  3. PAYROLL

  4. PROFESSIONAL SERVICES

  5. UTILITIES

     • Every expense category includes multiple budget line-items such as:

     • Electric

     • Garbage and Recycling

     • Natural Gas

     • Water

     • Sewer

A FEW THINGS to KNOW ABOUT US TREASURIES & BROKERED CDs

Upcoming US Treasury Auctions | Current Fixed Income Yields (Bonds, CDs Munis)

• As with any financial account, you’ll need to keep your authorized signers up to date.   The process might be more arduous with a brokerage account vs. working with your local bank.  READ: Principal Guaranteed Securities: Don't Trade Convenience for Yield!

  • If you don't already have one, please consider establishing a brokerage account to invest in Treasuries unless your existing banking relationship provides this ability.  Treasury Direct IS NOT recommended (see below.

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• US Treasuries generally have a $10MM limit per purchase

  • CICs with significant reserves can easily invest in large tranches

  • Both FDIC insurance and US government debt securities (Treasuries) are backed by the full faith and credit of the United States of America

    • US Treasuries make the $250,000 FDIC insurance limit irrelevant.  

    • If the US Government defaults on its debt,  gold bullion is likely the only way to guarantee your principal.

      1. Let's be honest, your CIC is not going to invest in precious metals, right?

    • Certain financial institutions allow you to auto-roll your T-Bills just like auto-rolling a CD or IFND

  • US Treasury Zero-Coupon Bonds provide a discount to face value at the time of purchase relative to their yield.  Their principal value also fluctuates more than other bonds based on FOMC action to adjust overnight interest rates.

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• US Treasury I-Bonds adjust their yield semiannually (May & Nov 1st) relative to inflation.

• I-Bonds don't work well for CICs.  Here's WHY:

  • You need a Treasury Direct account with a single “Entity Account Manager" who MUST:

    • be a corporate officer or designated employee and 

    • be authorized to act alone

  • Your CIC is limited $10,000/yr of electronic purchases via Treasury Direct

  • I-Bonds must be held a minimum of twelve months

  • I-Bond redemptions before five years forfeit three months of interest

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• Brokered CDs typically pay a higher APY than comparable term CDs from your local  or national bank.

  • Compare Forbes Advisor and Bankrate with brokered CDs from Fidelity

• Brokered CDs’ principal value can change unless held to maturity

  • Time to maturity and interest rates impact the value

    • Falling interest rates may allow the sale of a brokered CD for more than its original value

    • Rising interest rates may lock in a brokered CD to maturity because disposing of it would result in a loss of principal

  • Some states’ ‘Blue Sky’ statutes restrict purchasing brokered CDs from other jurisdictions.

• Brokered CDs may include a call option that allows the issuer to redeem them at face value (plus unpaid accrued interest) prior to the stated maturation 

HOW CAN YOU INVEST?

Many state CIC statutes require reserve funds to be in "income earning" accounts, but the "income earning" requirement does not prohibit investment in corporate or municipal bonds, stocks and/or other securities.  Warren Buffett advises investors to “avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics.”

Volunteers often have no professional experience managing money for others.  For that reason alone, every organization should establish a written investment plan that requires the discretion of the Board to vote and that clearly establishes priorities and risk tolerance.    

• Do you understand your cash flow needs for the next 1, 3, 5, 10, 20 and 30+ years?  Plot it out 

• Do you understand interest rate risk?

  • Investing is never “safe” if you lack access to cash when you need it.  Selling principal-guaranteed securities before their maturity date is often subject to penalties and/or principal loss (or gain).

• California is the only state with somewhat restrictive statutory limitations related to investment of common interest community funds.

  • CA Civil Code § 5380 prohibits managing agents from depositing reserve funds in "stocks or high-risk investments."

  • Notably, this prohibition does not regulate how associations, their Boards and their investment advisors can invest reserve funds.

• Indiana specifies permissible reserve investments in IC 32-24-4-4 which references IC 5-13-9.

• REVIEW: the investment legal memo in our Reserve Resource Document

• READ: Principal Guaranteed Securities: Don't Trade CONVENIENCE for YIELD

• READ: DOLLAR$ and SEN$E: Are you Investing, Gambling, or Guessing?!?

• READ: Moody's Rating Scale for Debt Securities

Your Association COULD potentially qualify as a 501(c)(4) or 501(c)(7)

First, read this and this from the IRS. Then read 26 U.S. Code § 528 - Certain Homeowners Associations.  View the various types of 501(c) designations.

READ 501(c)(what?)

501(c)(3) status will NOT become a reality for you.  Donations to your association are NOT tax deductible.

Below is a memo from Gary Porter, CPA.  Read more about Form 1120 and 1120-H.

By way of background I am a CPA who has assisted more than a hundred associations obtain exempt status and have fought the IRS Appeals office and won more than twenty times.  I'm also the CPA who wrote the book that virtually all CPAs practicing in the community association industry use as their primary technical guidance on accounting and tax matters.  I also have the dubious distinction of having provided consulting on more than 70 IRS audits of associations - only two of those for tax returns I prepared.

For this conversation I refer you to two websites our firm maintains that are intended as information resources only, purposely kept separate from our firm website. 

• https://associationtaxes.com - This site provides a comprehensive discussion of the various tax approaches association may consider.

• https://501c4taxexempt.com - This site provides comprehensive information regarding tax exempt associations. 

This topic continues to be of interest and I have spoken at CAI's Law Seminar on this topic three times over the last decade or so.  The reasons why most associations seek exemption under IRC Section 501(c)(4) are generally (1) safety and (2) tax savings.

Safety is in the form of avoiding the tax risks inherent in filing Form 1120 and most of the associations seeking this safety cannot qualify to file Form 1120-H because of the extensive lifestyle programs provided by the community.  Many of these associations are communities of several thousand homes with extensive recreational programs.

Tax savings are realized because interest income and capital gains are not taxable to 501(c)(4) organizations.  Another factor is cell tower lease income which is taxable on either Form 1120 or 1120-H.  But, if those cell towers provide signals outside the geographic area of the association then they are providing a public benefit - that makes this activity a core exempt purpose activity and the income tax exempt. 

Only 501(c)(3) organizations can deliver a tax deductible benefit to members for their dues payments.  As was pointed out, I am aware of only three associations in the US that have successfully qualified - one in Florida, one in Nevada, and one in California.  This is so rare as to not even warrant conversation.

In my CPA practice I spend too much time educating IRS agents as to what the law and related rulings and court cases mean for exempt associations.  Their training material trains them that "public access" is the ONLY criteria.  That is a blatant misinterpretation of the law which clearly states that "public benefit" is the primary factor and they are not the same thing.

Regarding the proposed capital contribution by members to the association that is something that we see on a regular basis. in our association client base  because of the types of associations that we represent - many large associations spread through 22 states.   Virtually all such contributions would qualify as capital contributions under IRC Section 118 so would not be taxable to the association.  This is the same code section that allows your reserve contributions (for capital expenditures only) to avoid taxation.  Below is a link to an article on our website that addresses code section 118.  I have written more than 400 articles over the last four decades but this article has always been the most popular having been read more than 40,000 times. 

https://pl.cpa/index.php/publication/reserves-as-capital-contributions

Gary Porter,

CPA Porter & Lasiewicz CPA